Bootstrapping vs. Raising and Why You Should Do Both

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By: Phillip Bogdanovich

Have you ever heard it said that everyone should have to wait tables at least once in their life? Waiting tables teaches you the importance of respect, the value of hard work and humility to boot. It reminds you that those grinding it out in the service industry are just like you. It makes you a better tipper and a more understanding customer. You don’t have to wait tables to learn these things, but it certainly helps.

Bootstrapping a company is the entrepreneurial equivalent of this kind of life lesson. You don’t have to fund a company internally to be successful, but doing so gives you invaluable insight you might not otherwise get—or you might get when you have a lot more to lose. Here’s what I’ve learned from both approaches to funding and why I think the best approach is not one or the other, but both.

What I Learned from Bootstrapping

Getting Comfortable with Being Uncomfortable

My first startup was bootstrapped, although looking back it wasn’t really by choice. Like most new entrepreneurs, I didn’t know any venture capitalists and I had no idea how to approach people and ask for money. I was also abrasive and hard for people to connect with, so investors weren’t exactly lining up at my door.

Not having access to investment capital taught me critical business lessons including cost management and how to make progress for little to no money. Because I was forced to get comfortable without financial resources, I never developed an unreasonable dependency on them—or an unreasonable fear of losing them. Money was just a tool, not the only means to my desired end.

If going to war gave me a Bachelor’s in suffering, bootstrapping a company made me a Ph.D. Every day in a startup is like a forest fire, fueled by a cash crisis, a team dispute, a market collapse or some combination of threatening factors. It teaches you what constitutes a real emergency and how to manage crisis.

Paying Your Dues

Bootstrapping also gives you street cred with investors, who expect founders to suffer and invest their own time and money into their company. They want to see that founders have skin in the game, can do a lot with a little, and are committed even against odds that seem overwhelming.

What I Learned from Receiving Funding

Breathing Room is Okay, Too

When I finally had the opportunity to be a part of companies that raised money, I learned some important lessons about velocity, opportunity, and the interplay between the two. My second and third companies both received limited funding and grew in value significantly faster than my first. We scaled our headcount and our revenue, expedited R&D to be first to market, and expanded our tech patent portfolio, increasing our intrinsic value in the process. I traded some equity and control for more breathing room and fewer bleeding ulcers. Money provided people and expedited progress, and the momentum and excitement it created was palpable.

It also brought to light an issue that, unbeknownst to me, had been driving the ultra-self-sufficiency of my first company: control.

Beware of Control Issues

I have always had a strong desire to keep as much control over my companies as possible. This desire makes bootstrapping attractive—it gives me a death grip on my company’s equity and everything from R&D to hiring to branding.

Taking on investors (and thereby speed and market share) means giving up equity and control. It’s not unusual for founders to be diluted right out of companies they started—just look at Facebook’s Eduardo Saverin. You could bleed for years for a company, only to end up as a footnote reference. You could have board members with less industry expertise and more ownership than you. They might want to take the company in a direction that doesn’t align with your original vision.

If you’re like me, this idea is nauseating. Or it was, until a wise mentor asked me if I’d rather own 10% of a billion-dollar company or 100% or a half-million-dollar company. It turns out control isn’t the only thing of value in entrepreneurship.

The Best of Both Worlds: Bootstrap Your Raise

While industries, circumstances and markets obviously influence the best course of action for each company, my experience has shown that bootstrapping until it’s time to raise is generally effective. Running as lean as possible through R&D, market testing and proof of concept shows investors you have the drive and industry knowledge to navigate your market without using cash as a crutch.

Unfortunately, bootstrapping just long enough and raising no sooner than necessary are extremely difficult skills to learn. You must focus on creating a brand presence while researching, developing, and building your product to get it to market quickly so competitors with more resources don’t beat you to the punch. Most entrepreneurs don’t have millions to hire engineers or skilled labor to build a prototype—but most investors have a hard time imagining possibilities without one. This is where true entrepreneurial talent becomes evident.

Success = Time + Ownership + Persistence

Success is a function of time, ownership, and persistence. With enough of these three components in the right configuration, any business can be successful. The trick is finding the right configuration—striking the best balance for the strongest returns.

Money is a force multiplier that shortens timelines and increases access to talent, but it usually reduces ownership. The founder’s job is to determine how much ownership is appropriate to give up for efficiency and speed to market—to locate the edge of diminishing returns where going slow will cost more market share and company value than he or she can make up. Once that boundary is identified, the next challenge is to raise only as much as is needed to generate escape velocity—to get far enough ahead of competition to render it non-threatening.

So remain calm, and be realistic about the limits of both bootstrapping and raising. But also be aware of where and why each is appropriate—and how striking the right balance between the two may be exactly what you need to generate liftoff.


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